Mortgage lenders cut 10-year fixed rates ahead of Bank rate decision

Mortgage lenders are cutting interest rates on 10-year fixed-rate deals while raising them on short-term loans, in a sign that borrowers are seeking certainty over costs amid expectations of rising inflation and interest rates.

Lloyds Banking Group this week brought out a mortgage with an interest rate fixed for 10 years at 1.66 per cent. The deal is available to borrowers with a deposit or housing equity of at least 40 per cent and carries a fee of £999.

Halifax also launched a 10-year deal at 1.68 per cent for 60 per cent loan-to-value borrowers. The moves follow cuts in long-term fixes last week by TSB and Virgin Money.

Chris Sykes, mortgage consultant at broker Private Finance, said the Lloyds rate was the lowest 10-year rate he had seen, edging out a 1.74 per cent deal offered by TSB which previously led the market.

“Competition in the 10-year fixed rate market is fierce and has emerged as a key battleground for lenders,” he said. “As we now expect consistent base rate rises for the next year and likely more . . . we are seeing increased inquiry levels and increased interest from potential borrowers.”

Expectations are high in markets and among economists that the Bank of England will today raise interest rates in a bid to curb inflation, which hit 5.4 per cent in December. The Bank raised its main interest rate from 0.1 per cent to 0.25 per cent in the same month and has signalled that further rises are likely this year.

While lenders are competing for new customers looking for longer-term fixes, many announced small rate rises this week on shorter-term two-year deals that have been the traditional mainstay of the home mover and remortgage market, as well as the standard variable rates to which borrowers revert after a fixed-term deal elapses.

From Friday, interest rates on a range of residential mortgages at Coventry Building Society will rise by up to 30 basis points. Coventry, Suffolk, Skipton, Hinckley & Rugby and Buckinghamshire building societies were among the lenders to raise their standard variable rates by 0.15 percentage points on Tuesday.

Aaron Strutt, product director at broker Trinity Financial, said many fixed-rate mortgages were becoming more costly in anticipation of another base rate increase. But he added that the expected rises would still leave mortgage rates cheap in historical terms. “The cheapest two-year fixes are a fair bit more expensive than they were, but if you want a five-year fix they are still available below 1.3 or 1.5 per cent.”

Until recently, long-term fixes were substantially more expensive than short-term options and they continue to carry often stiff penalties for those wishing to pay off their debt early. The Halifax deal carries an early repayment charge of 6 per cent up to 2027, gradually reducing to 1 per cent by 2032.

But the difference between the average two-year fixed rate and the average 10-year rate has now narrowed to 0.41 percentage points, according to finance website Moneyfacts. Sykes said it was possible that people now locking into a 10-year deal would end up with a mortgage interest rate lower than the Bank of England’s base rate, assuming expectations of successive further rises by the central bank were borne out.

Borrowers’ appetite for longer-term fixed-rate deals comes as mortgage affordability is being increasingly stretched by rising house prices, particularly for first-time buyers without the benefit of existing housing equity. Nationwide this week said house prices rose by an annual rate of 11.2 per cent in January, accelerating from 10.4 per cent in December.

But for those able to qualify for a mortgage, the shift to longer-term deals is likely to pick up pace in 2022, brokers said. This has the potential to bring the UK mortgage market closer to the model of the US and continental European market, where it is common for interest rates to be fixed for the long term or the full length of the mortgage.

In the UK, lender Perenna is developing mortgages with a fixed rate for the life of the loan, and said it expected to launch a suite of deals this year. Colin Bell, co-founder and chief operating officer, said: “In markets where this product is well established, it becomes the product of choice. In the US, 80 per cent of mortgages are fixed for the long term.”

In a climate of rising interest rates, he said UK borrowers were likely to warm to the idea of locking in a low rate for longer. “There are lots of people who’ve never seen a substantial interest rate rise and they’ve forgotten what that means for them.”

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